An end to 'corporate access'?

Investment banking is an area rife with potential conflicts of interest, as the dot-com crash a decade ago showed. Investment analysts, for example, were paid to make recommendations to their banks' fund manager clients while also getting involved in promoting the shares that the corporate finance wing of the banks were trying to sell. In the aftermath of that crash, investment research changed radically, and in its place came, among other things, greater practice of what the banks call "corporate access" – getting corporate executive into the same room as fund managers for a private or semi-private tête-à-tête. This service – nominally free to the fund manager – often forms part of the bundle of things the banks give to clients to generate transactions commission. Now a think-tank thinks it's time to rethink that, too.

EuroIRP, a trade association of independent research analysts, commissioned a report from the Centre for Financial Innovation that argued that corporate access is just another way of creating an uneven playing field between the banks and the independent researchers who have to charge for their services. They got a boost in the UK when the Financial Services Authority forced banks to "unbundle" their services to buy-side houses, so only "research" could be tied to execution services. The CSFI report says: "Five years after the introduction of the FSA's new regime on unbundling, the independent research sector is growing, both in number of firms and in the demand for their services by buy-side fund managers." But that doesn't mean everything is rosy. Revenues from the buy-side are under pressure. "The sell-side model is increasingly a combination of execution, research that at times is commoditised and corporate access based on leveraging client banking relationships," it says. "Corporate access does not fall within a definition of research, which requires it to contain 'original content' and is, therefore, not a legitimate use of dealing commissions."

Not all "independent" researchers are independent, of course. One version of the practice involves companies paying the research firm to write an analysis of the company. That's normally governed by a contract that limits such reports to analysis and not recommendation. But that, too, is a tough sell, even if the buy-side doesn't have to pay for it.

Source document: The research report "Has independent research come of age?," by Vince Heaney, is a 40-page pdf file.

What does it mean to be responsible? OECD answers

For a lot of executives, the term corporate social responsibility sticks in the mouth, the way that loose cotton does. You can't swallow it, but you can't quite spit it out, either. For multinational enterprises, however, CSR has become, if nothing else, a cost of doing business. Various organisations – non-governmental, governmental and others – keep an eye out on corporate behaviour. The standards they judge by aren't nearly as precise as accounting rules, but it helps to know where you stand against certain standards. The Organisation for Economic Co-operation and Development has issued an update of its guidelines about what makes a responsible business. "Obeying domestic laws is the first obligation of enterprises," it declares. And if the OECD's guidelines conflict with local law, well, "enterprises should seek ways to honour such principles and standards to the fullest extent which does not place them in violation of domestic law". And what should they do? First is this:

1. Contribute to economic, environmental and social progress with a view to achieving sustainable development.
   
2. Respect the internationally recognised human rights of those affected by their activities.
   
3. Encourage local capacity building through close co-operation with the local community, including business interests, as well as developing the enterprise's activities in domestic and foreign markets, consistent with the need for sound commercial practice.

And more.

Source document: The OECD document "Guidelines for Multinational Enterprises: Recommendations for responsible business conduct in a global context" is an 86-page pdf file.

Singapore code changes seek focus on long term, sustainability

The Singapore Corporate Governance Council wants to modify its code of conduct for company to emphasise the long term future of the company and play up the board's responsibilities for environmental and social impact. The code also adds a prescription to the board's duties, saying that it should "identify the key stakeholder groups and recognise that their perceptions affect the company's reputation". It has issued a consultation paper suggesting stronger language on director independence, as well as new provisions on board composition, director training, multiple directorship, alternate directors, remuneration practices and disclosures, risk management and shareholder rights.

The proposed code, revised in the aftermath of the global financial crisis, generally tightens provisions. The current code, for example, proposed "appropriate training" for incoming directors. The modifications would make that read "comprehensive and tailored induction". First-time directors should be offered training in accounting, legal provisions, and industry-specific knowledge. But it continues to recognise the peculiarities of the island state's family-led business structures, including a new section defining the need for at least half the directors to be independent when the CEO and chairman are either the same person of members of the same family. Otherwise, independent non-executives would only need to make up a third of the board, as the current code provides.

Alan Chan, the CEO of Singapore Press Holding who chaired the panel, said, "the Council recognises the need for corporate governance practices to be adopted on a contextual basis, and has sought to adapt rather than replicate relevant practices of other jurisdictions. The proposed set of recommendations is a balanced package that not only serves to enhance Singapore’s corporate governance standards, but is also pragmatic and workable in practice."

Source documents: The consultation paper is an 18-page pdf file. The news release has links to the draft code and annexes.

http://www.mas.gov.sg/news_room/press_releases/2011/Consultation_on_the_Proposed_Revisions_to_the_Code_of_CG.html

Why 'stewardship' matters

The relationship between shareholders and companies is fraught, not least by the long supply chain in investment management, with its intermediaries and fiduciaries standing in a long line between the end-investor and the company. Part of the appeal for greater transparency and commitment along that chain comes in the form of urging major institutional investors to act more like owners of companies, rather than traders in securities. The reasons for this approach are manifold, so too the objections to it. But it is an issue that arouses much passion and a fair degree of government and regulatory concern, so stewardship is not going off the agenda anytime soon. The think-tank Tomorrow's Company has produced the latest of its reports on the subject, it which it defines stewardship this way:
… the active and responsible management of entrusted resources now and in the longer term, so as to hand them on in better condition.
It continues: "It is an approach to performance and accountability which runs throughout the investment system and beyond it into the stakeholder relationships. From the simplest family business to the most complex web of investments, stewardship connects the needs, priorities and preferences of investors with the decisions of companies."

Coming alongside last year's Stewardship Code, issued by the UK Financial Reporting Council, and work in the European Union with similar aims, this report seeks to champion the idea that investment firms need to spend more on understanding the direction their investments are taking in terms of something more than price.

Source document: The Tomorrow's Company report "Why Stewardship Matters" is a 32-page pdf file.

What makes for better boards?

Many boards have changed structure and composition in line with the consensus that emerged over the last 20 years that some approaches to corporate governance are indeed better than others. Yet corporate crises continue, as anyone who has lived through the financial crisis knows all too well. Simon Wong, a consultant on governance and law professor thinks that boards need to look inside at what happens in the boardroom, rather than at the shape, size or colour of boards, for the key to better government. We recently read a long version of his analysis of board dynamics, and now a short version has appeared in McKinsey Quarterly online. In it he argues: "To embed an ownership mind-set in the boardroom, companies should look for energy, a 'can do' attitude, and an independent mind when they recruit directors" So boards should ask candidates the following questions:

• How should non-executive directors be involved in the development of strategy?
  
• What type of information would you need to discharge your responsibilities effectively and how would you obtain it?
  
• In your previous board roles, in which areas did you have the greatest impact?
  
• In a group setting, when have you taken a stance against the prevailing majority view and what was the outcome?

"It's a clear warning sign when a candidate cannot mention an occasion when she or he disagreed with management," Wong argues.

Source document: The article "Boards: When best practice isn’t enough" makes interesting reading.

Kay Review to focus on long-term orientation in investment

The UK government has found a new solution to the problem of short-termism in investment markets: set up a new expert panel. The Department of Business, Innovation and Skills has commissioned John Kay, a prominent and public economics professor, to come up with ideas of how to wean the world of fund management from its fascination with short-term profits of the companies in which they invest. "It is especially urgent that we work out how the equity investment regime can be recalibrated to support the long-term interests of companies as well as underlying beneficiaries, such as pension fund members," Business Secretary Vince Cable said. Kay will examine investment in UK equity markets and its impact on the long-term performance and governance of UK quoted companies. He will look at how the investment chain currently works – from company boards, through pension funds, advisers and fund managers, to ultimate beneficiaries.

Kay is a columnist for the Financial Times and a controversial academic, when he headed up the Said Business School at Oxford in its early years. He is something of a maverick, whose views on reforming banking by breaking retail and commercial activities from investment banking didn't quite make it into the government's recommendation but certainly shaped the debate. Now he gets to recommend law and regulation directly.

Source document: The terms of reference lays out the dimensions of the study in a two-page pdf file.

UNPRI goes for relaunch and redesign

The UN-backed group seeking to promote the Principles for Responsible Investment is launching a redesign of its reporting and assessment framework and opening it up for broad consultation during September and October. Investment firms that sign up to PRI will be required to report using the new framework from 2013. Next year participation in the survey will be voluntary, during which time the framework will be thoroughly tested. "We have learnt a lot of lessons over recent years, and there were certainly concerns expressed by signatories," said James Gifford, executive director of the PRI Initiative. "From our discussions with investors, we believe there is a real need for a reliable process to assess responsible investment capability, and like all other areas of business, there needs to be clear indicators of progress and success."

Source document: The UNPRI news release gives a few more details.